Fiat Currency

“Fiat money” is a type of currency that a government has declared to be legal tender, but it is not backed by a physical commodity like gold or silver. The value of fiat money is derived from the relationship between supply and demand and the stability of the issuing government, rather than the worth of a commodity backing it.

Historically, currencies were based on physical commodities such as gold or silver, but fiat money is based solely on the faith and credit of the economy. If people believe that the currency has value and they can exchange it for goods and services, then it will function as a means of exchange.

The U.S. dollar, the Euro, the Japanese Yen, and the British Pound are all examples of fiat currencies. They have value because their respective governments say they do, and people have faith in the stability of those governments.

The benefit of fiat currency is that it gives central banks greater control over the economy because they can control how much money is printed. However, it also comes with risks. If a government prints too much money, it can lead to hyperinflation, as happened in Zimbabwe in the late 2000s.